Fitch Rates Richmond, Virginia's Rfdg GOs 'AA'; Stable Outlook.

WASHINGTON -- Fitch Ratings assigns an 'AA' rating to approximately $154 million general obligation (GO) public improvement refunding bonds, consisting of $61.8 million series 2005A bonds and $92.2 million series 2005B bonds. Both series of bonds are expected to sell on or about July 12 through a syndicate led by Morgan Keegan & Company, Inc. Bond proceeds will refund approximately $167 million in outstanding GO debt for economic savings. Fitch also affirms the 'AA' rating on approximately $685 million in outstanding GO debt. The Rating Outlook is Stable.

The 'AA' rating on the GO bonds reflects Richmond's strong financial management, sound fiscal operations, and stable economic base. The city is the core of a growing metropolitan area and a regional center for employment and cultural amenities. Tax base growth has accelerated since fiscal 2001, the result of both a more aggressive assessment policy and a sizable amount of new development. Job and income growth still lag gains in the tax base. In addition, continued success in school reform is likely to further economic growth and reinvestment in the urban center of the region, but as a result school needs continue to pressure both the city's operating and capital resources.

Richmond is the capital of Virginia (the commonwealth), and the commonwealth is the city's largest employer. The majority of the commonwealth's 40,000 employees in the metropolitan statistical area (MSA) are located in the city, including those at Virginia Commonwealth University (VCU) and the Virginia Commonwealth University Health Systems (VCUHS). Federal judicial and banking institutions further anchor the governmental sector. Financial services, health care, and the headquarters of six Fortune 500 companies provide economic diversification. Major development successes include expansions of the regional convention center and VCU, the reopening of the Main Street train station, and the opening of Stony Point Fashion Park, an upscale mall within the city limits that draws customers from throughout the region.

The residential unemployment rate is consistent with levels during the mid-1990s. The May 2005 rate of 5.2% is below the 6.4%-plus levels recorded from 2002 through 2004. The level is still above the state's 3.7%, however, but is on par with the nation. The population declined 2.5% in the 1990s and is down 1.6% since the 2000 census, consistent with other urban centers both in Virginia and nationally that lose population to the suburban areas. Per capita personal income for 2003 is on par with the state and is 107% of the nation. Although income growth continues to lag broader averages, some statistics show these levels growing faster than the state and nation.

In the spring of 2004, the General Assembly of Virginia adopted legislation that permitted the change of the city's charter from a council-manager form of government to a strong mayor-council form. On Nov. 2, 2004, the city elected a former governor of Virginia, Douglas Wilder, as its mayor, with over 80% of the popular vote. The mayor took office on Jan. 1, 2005. Although there have been several changes within city departments and increased investment in public safety by the new administration, the mayor has retained key financial personnel, and the mayor and city council remain committed to the financial policies and debt affordability guidelines previously established.

Adopted policies govern financial operations and limit debt issuance. The city council strengthened its fund balance policy a few years ago, increasing its goal for maintaining an undesignated general fund balance to 7% of budgeted general fund expenditures and transfers out, up from 5%, and remains committed to this level. Audited fiscal 2004 results indicate the city has surpassed this goal, with an undesignated general fund balance of $39.1 million, or 7.6% of expenditures and transfers out. Preliminary results for fiscal 2005 show the undesignated general fund balance remaining at $39.1 million, which will reduce it as a proportion of expenditures, but that it will remain within the 7% policy limit. City officials have budgeted additional moneys for fiscal 2006 and fiscal 2007 in order to maintain the fund balance level consistent with its policy.

The tax rate was reduced to $1.33 per $100 of assessed valuation in fiscal 2006 from about $1.38 the prior fiscal year, reflecting the strong redevelopment and tax base growth occurring within the city. However, the rate still remains considerably above that of surrounding jurisdictions. The tax base grew 13.4% for fiscal 2005 and has averaged an annual growth rate of 8% since fiscal 2001. Current total tax collections have improved to 96.7% for fiscal 2004 from a weak 93.6% the prior fiscal year. Preliminary indications for fiscal 2005 show the collection level remaining consistent with the fiscal 2004 level. Overall debt is slightly above average for the rating category at about 3.8% of property market value and $2,907 per capita. Fitch expects debt ratios to rise in coming years as additional school-related capital needs are more fully incorporated into the city's capital planning. However, the city currently is at or above two out of the four debt capacity policies, which may lead to significant deferred maintenance of both school and general government facilities over the near term if additional funding sources are not identified. The $428 million fiscal 2006-2010 capital improvement program (CIP) includes additional GO bond sales of $14 million on average with self-supporting utility system revenue bonds to finance over two-thirds of the total CIP.

Fitch's rating definitions are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.